Thursday, June 30, 2011

The Mortgage Servicing Fiasco

Back in the very early 1990's, a company that I worked for acquired a fairly obviously screwed up mortgage company that the business managers coveted, more for girth than quality it seemed to some(this comment may seem elitist to some but the CEO of the to be acquired company did not know how to hold silverware at dinner, had a caveman grip, and he treated women in his attitude and attempts at jokes, well, poorly is the polite word).

The investment banker and fairness opinion advisor for our company was Lehman. To no avail I called hq from their offices late on a night of prospectus editing a few days before closing and reported some of my serious concerns. Unheeded, but sympathetically understood by some, I got off of the phone and the Lehman securities analyst that covered the mortgage business laughed and said, "there are more ways to lose money in the mortgage business than there are ways to get shot in Beirut" (early 90's remember).

Here we are today and the banks are taking almost all of the blame - not the facilitating regulators, not those customers that were dishonest, not the Government Sponsored institutions like Freddie and Fannie that were mandated by Clinton, Frank, Cuomo and company to expand into subprime, and certainly not the brain trusts at Pimco and other exceptional firms that bought the securities that could have been researched thoroughly before investment. Just the evil banks it seems.

There are two major parts to the business. Origination is sourcing the loans through offices or brokers, with terms decided and evaluated by the originating bank. Countrywide, WAMU, Golden West, and a host of smaller players like the dead IndyMac, Taylor Bean, and others really stretched the imagination and at times legality on origination terms and a few of the bigger firms partially followed in order to compete.

Servicing is the other big aspect of the business. After origination, servicers manage the payment flows and enforce the terms of the mortgage agreement. It's a white collar clerical administrative function primarily, but with a substantive hedging capability needed, through derivatives, to protect the sourced loans from the time of the servicer's acquistion until they can be packaged and sold to investors. This deriviatives function allowed the Congressional oversight committee to pay Fannie and Freddie CEO's at levels only exceeded by Goldman Sachs, even though they were government sponsored and primarily back office functions.

The major origination culprits are well known but many are out of business. So now the deep pockets of the servicers are under attack. Servicing firms did make mistakes. They were in no way prepared for the collapse of the mortgage market in '08 and '09, as they, like almost everyone, considered the subprime issues to be a contained event, of concern but in the larger scheme of things a small part of the mortgage market. Credit default swaps were, at the time, the little known catalyst for the disaster that was coming.

Servicing firms or servicing divisions at major institutions were often run, at the top, by non-tech admin types, trusted colleagues of the CEO's and others who were expected to be able to bridge the gap between the techies and quants and the executive management, and explain in layman's terms what was going on the businesses. When the disaster happened, these managers did not have the skills to manage, and their executive bosses knew next to nothing about the intricacies of this back office function.

Bank of American(Countrywide) and Wachovia now Wells Fargo(Golden West) had made conscious, so to speak, decisions to acquire major poor originators, while JPMorgan(WAMU) had taken a company off of the government's troubled hands with the expectation of some bias toward protection. BofA is getting hit at every turn and all of the major servicers are expected to be the subject of huge penalities at both the federal and state levels, as well as through civil suits as the trial bar gets their teeth into this.

Those are pretty much the facts seen from here. Here are some major problems seen by this admittedly former banker. I've done worse things but they probably have been diminished considerably in the minds of some by my role in my former profession(missed this debacle but left in 2003 after trying to explain the Enron disaster for over a year).

---Bank of America is estimated to be paying $5.5 billion to Fannie and Freddie for selling poor originations to those government backed organizations whose only, sole, primary, mandated, function was to know and understand the mortgage business, and they were under executive order and congressional mandates to broaden their credit standards to the subprime arena. With the precedent set, others will pay as well. This is paying the government for their bad management, private companies following the lead of their government sponsors.

---With the various penalities and with the civil suits on the horizon there will be judgements for not only losses but outsized punitive damages as well. Administrative mistakes in a crisis whose magnitude virtually no one foresaw is neither a crime nor a punishable offense. Many of the mistakes were made as overwhelmed servicers outsourced large portions of the work to admin "consultants" and there is the source of the robo-signing disaster, consultant fraud but they have no deep pockets and are mostly being sued for what little money they didn't squander or they are out of business.

---Laying virtually all of the blame for the mortgage fiasco on the major banks is no way to get an economy back on its feet. Like them a little or hate them a lot, banks move money from savers to investors to entrepreneurs and manufacturers. If they are generally discredited and their capital is depleted in an unpredictable way over several years the economy will suffer. Many politicians and particularly our executive branch think that the government can recycle investable funds in a more moral and efficient way than the banks. There is no track record to prove this, and recent uses of government funds to primarily prop up unsustainable public service practices rather than invest in infrastructure or near term projects(not green energy solutions 10 years away) is current evidence that the economy needs a vibrant private banking system. As laudable and reliable as some regional and community banks can be, they do not participate in a world in which funds are sourced and priced globally, and they will only be able to facilitate a micro recovery in a macro world.

---Giving Blackrock and Pimco and others of the most sophisticated and well educated groups of investors massive compensation from the banks that were selling mostly legal paper with highly detailed, at times obtuse, but researchable information under securities laws is almost ass backwards in the servicing cases. Servicers are facilitators of administrative functions, they are not MBA's or PHD's. Where is the shared responsibility?

Banks made mistakes(some inexcusable ones at firms like Lehman, Bear, Merrill, Citi, and the bad mortgage originators previously mentioned). All involved banks should have some financial penalties and they should be held accountable, but held accountable on some kind of level playing field. It's as if major investors, hedge funds, regulators, the GSE's, the fraudulant buyers, the non-Wall Street retail brokers that loaded up retirees portfolios with small illiquid pieces of these securities, the system gamers, all of them, were just the victims of the banks. It's the easy answer for the politicians, it's the easy answer for people who made their own bad decisions, but it's not the quick way out of this mess.

It does, however, give everyone someone to hate, and that is for some reason a comforting alleviation to the human condition.

Monday, June 27, 2011

Economic confusion - we are not alone

We wonder about the economy in a way that has become a national obsession. Are we just on a plateau with little clear direction, is there a cliff just beyond the sightline, or are we just catching our breath before making the next climb.

Do we wish that economics had been our course of study years ago? Do we hope that a trusted friend, smart relative, Bill Gross, or Warren Buffett will enlighten us? Do we waste our days listening to people with nothing more important to do than blather their time filling thoughts on CNBC, hanging on every word and changing our minds every 15 minutes? Do we miss Dylan Ratigan who didn't even pretend to have any idea what he was talking about? Well, at least we still have that Brit guy named Simon in the mid-morning who makes no sense at all.

We are certainly not to be criticized for hoping for answers and looking for guidance. Unfortunately there is none to speak of, so I guess fortunately we cannot consider ourselves alone.

After the Fed's two days of meetings this past week, I quote from Chairman Bernanke's public comments including some NYT synthesis.
---"We don't have a precise read on why this slower pace of growth is persisting. Some of the headwinds that have been concerning us, like the weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues, may be stronger and more persistent than we thought."

Headwinds on the plateau but no way to measure them and no way to construct a consistent paragraph that says anything beyond what a smart sixth grader might know.

---"The Fed's policy board voted unanimously to maintain its two year commitment to hold a benchmark interest rate near zero 'for an extended period of time'. Mr. Bernanke said the language meant that it would not raise interest rates for 'at least two or three meetings'. Economists consider it likely that the central bank will hold interest rates near zero well into next year."

So as we sit waiting for some direction or insight, the government keeps robbing the elderly and all others on fixed incomes and penalizes savers at a time when they are at the same time they are blaming excessive borrowing for our woes.

---"Mr. Bernanke renewed his warning that short term cuts in government spending could retard growth, while at the same time urging a long-term deficit reduction plan, which he said could spur short term growth."

Say that again please. There was an old time Texas banker, a successful one, who often said "the long term is just a series of short terms".

This is not meant to belittle Bernanke and his serious attempts to deal with a difficult situation. He has made some tough decisions. The comments quoted here may well be the best that are possible at the moment. Unfortunately they reassure no one, and could be seen by some as having somewhat of a patronizing tone.

Thursday, June 23, 2011

ESBI scam and Verizon's complicity

ESBI is some sort of outfit that charges for unordered services through Verizon and other phone service providers. They are a scam operation. Here's my story.

My Verizon bill, not a small one, comes monthly and with two land lines and four smart phones operating, plus maybe a movie or two ordered by my daughters, I usually just pay the bill pretty much unexamined. This month the bill seemed to be a little bloated unless someone made way too many land line long distance calls or viewed more pay films than usual. I examined the multi-page bill and found a $14.95 charge from ESBI(?) labeled "miscellaneous charges" billed on behalf of "Total Protection Plus" for "Electronic Fax Mofee". What the heck?

I found a phone number for ESBI and they explained that I had signed up for an ongoing monthly plan to send faxes directly from my computer. I had done no such thing, and have a fax capability already. They explained that they were just a collection agency and some other outfit had told them that I had agreed to this service. Not so I said, but they said that I had without a doubt responded to a pop-up and given appropriate information and permission. Not so, and I am sure of that because the number that it was assigned to is my personal land line that is used only by me for business purposes. No one else in the family touches it.

Then, of course, I called Verizon and questioned the charge. They gave me some rigamarole about how the FCC requires them to honor all charges that have been authorized and add them to the bill. They were adamant that they had no responsibility. I asked to speak to a supervisor but that request was refused as I was told that the supervisor would give the same answer. I asked to speak to the legal dept. and was told that there would be at least a 45 minute wait on hold and I would still receive the same answer. I admit to making a quick curse and hanging up.

Then I went to Google and other search engines and found numerous complaints about this scam. Many people have seen these charges come through with no clue as to how they originated. I called Verizon again and of course spoke to another representative who gave the same answer. I said "do I need to call the New York State Attorney General's office and lodge a complaint on my own when there are an entire class of people being hit by this scam that is facilitated by Verizon?" The Verizon rep's answer was go ahead and do that. We are only following FCC rules.

Then I called ESBI again with the same information about what I found on the search engines and a threat to report them to authorities. They then agreed to reverse the charge and end the "contract". We will now see what happens and if they follow through. Of course I have already deducted their charge from my just paid monthly bill with appropriate comment that will no doubt screw up Verizon's automated bill processing. Ha! for little victories, maybe.

Several conclusions: given the size of these wireless and land line phone bills it is almost a certainty that many people are not noticing the extra charge; ESBI is acting illegally; and Verizon is acting irresponsibly at best, illegally at worst.

Be forewarned and check your bills. I am absolutely certain that I never signed up for this service, and my search results bear out the fact that this is a scam that Verizon and maybe other carriers refuse to step up to and take any responsibility for halting.

Postscript: During the review of search engines, I see that there are a few apparently legitimate firms with the acronym ESBI, further confusing matters. The one in question stands for Enhanced Billing Services Inc.

Monday, June 20, 2011

The Achilles Heel of Euroland

With the situation in Greece and pending crises in southern Euroland, what we are seeing is the collosal mistake of creating the European common currency, central banking, and governance standards. Certainly a European zone of more open borders, more cultural exchanges, and trade liberalization would have been a brilliant move, but what we now have is a mess.

We can see the American model with its heritage of one main language and a relatively homogenous culture as a unified large land mass of relative prosperity(we hope) but could anyone imagine an Asiarama central bank combining Japan, China, South Korea, Vietnam, and Thailand among others.

That's obviously a wildly exaggerated comparison to what Europe has become, but combining countries with multiple languages, disparate cultures, and a history of 20th century wars was an ambitious goal. Robbing these sovereign countries of the ability to manage monetary policy, currency policy, and independent debt funding in the coin of their own realm has really destroyed their financial flexibility.

Some point to the continued strength of the Euro as proof that the concept is still viable and even successful, but that is open to question. The Euro's strength is just the mirror image of the dollar's weakness in light of a slowing economy and a ridiculous budget ceiling sqabble that should be settled by legislative spending debates rather than threats over U.S. near term solvency.

If only the crazed but tough and bullying DSK hadn't turned out to be such an actively scandalous and physically threatening weiner there might be some leadership capable of stabilizing this situation. At the moment, the market is frightened and looking at the possibility of interbank credit freeze-ups once again, good for no one.

Risk takers that make mistakes

Every Sunday the NYT has a page 2 column in the business section titled "Corner Office" and it features a Q and A with a CEO. Inevitably the CEO being questioned cites their encouragment of risk taking by employees, often with the phrase that "the best learning comes from mistakes".

This cliche was borne in the '90's tech boom and then morphed into the popular culture of corporate America speak. Opinion here is that it is a popular myth among the powerful, a self-promoting style of narcissism and the effort to become "legends in their own minds".

Sure, a few companies like Google famously allow for lone wolf experimentation but that's not the rule. Corporate America remains rigidly heirarchical and deviating from one's expected role is not a normal or desired behavior.

There are exceptions, and these allow the theorizing CEO's a sense of truthfulness. Within most corporates not run by outright tyrants, there are the knighted ones among the broad base of employees. They range from: eccentrics that are tolerated due to their brilliance; top college lacrosse players from good schools; the especially charming, attractive, or handsome; the most talented of the obsequious; the star examples of diversity; the brash barrel chested never satiated friend of all; and of course the well-connected by family connections, wealth, old college ties or a propitious marriage. Please don't feel excluded if other knight categories have not been mentioned. And of course there are a few non-knighted risk takers that slip through the cracks because the risks they take actually work.

But the real knighted ones mentioned can take risks and can make mistakes, and more often than not they are mistakes. They do learn from them, and what they learn is that they are more suited for "management" than actual work. In a corporation of, for example, 5000 people there may be as many as 200 or so of these knighted souls and the other 4,800 employees better just stick to their dictated tasks, hoping to safely move up the ladder to what in a different era was called job security.

So this was a cynical post, but week after week of these CEO's, male, female, minority, all, crowing about their encouragement of risk taking and the value of mistakes just grated on me to the point of writing these caustic words.

Sunday, June 05, 2011

Late night probably unadvisable thoughts

Just watched Treme on HBO, clicking back and forth to see Miami and Dallas.

Tomorrow may be a buying opportunity in the U.S. equity markets. It feels right but who knows what news could arrive and sour the feeling. Financial firms are being clobbered by government attacks so for good reason are down, but technology should not be such a victim, as it has been in recent days. Materials should firm up and industrials have taken their hit.

Barring more bad morning news, tomorrow should be an add day.

Representative Paul Ryan's misguided health care overhaul

First off, I must admit a bias. I think Ryan is a twit. His acknowledgement last week that he would consider running for President if there was a call for his participation says it all. He is smart enough to be dangerous but not so smart that he is any better than warmed up leftovers.

I'll agree with the consensus that confronting spending issues and the promises of the past is a worthwhile cause. Ryan, unfortunately, has bent over for every hocus pocus belief of what are called Republicans these days.

Privatizing Medicare is such a terrible idea. Elderly people are the least empowered, mentally and physically, to make the choice Ryan envisions that would make a free market solution work. In a broad sense, the responsible sons, daughters, and relatives for the elderly do not live nearby, and are working hard to maintain their own lifestyle and support their children. The beauty of the current plan is that it requires minimal paperwork on the part of the sick beneficiary and with any supplemental plan like the affordable AARP one, there becomes no cost whatsoever.

As an example of the challenges that Ryan's plan could lead to, Bush's boon to the pharmaceutical companies, known as Part D, is no easy thing to manage. My father couldn't fathom or read it in his last years, and since he took no drugs of consequence except during Medicare covered hospital stays, 550 miles away I did not pick up the challenge. My wife's parents have differing solutions, her father has the plan that must be tediously revisited every year by her and her mother may not because of guardianship and sibling issues that are unclear.

There are ways to make Medicare and Medicaid more efficient. With today's technology there should be ways to cut out the significant graft and mismanagement involved with the plans. There are likely intelligent ways to fund the younger generation's health costs if social security was once again separated from useable government funds, reversing a Clinton move that made him look good but, like AMT, is still a hangover from his governance.

Ryan's plan is flawed beyond belief. Let's let our sick, crippled, and senile folks make a free market work???

Saturday, June 04, 2011

It's always the same feeling...

When financial markets begin to get difficult there is always the realization that today's price is just that, and nothing that happens the next day has any relationship to some former baseline. It's the existential market thought.

Here we are again, not so dramatic yet but certainly offering that familiar feeling of uncertainty. Anything can happen in an area where that illusive term "confidence" rules, but today's market has none of the potential calamity attributes of the fall of '08.

There are no major financial firms in danger of collapsing and corporate profits are for the most part growing at well managed firms. There will always be poorly managed firms but they are not a barometer of the market unless in the majority, and they are not at present.

There are three distinct reasons why this month is different from two months ago. First, one of the world's four largest economies suffers from a catastropic earthquake and tsumami that disrupts its power supply and makes a large region potentially toxic. Japan is a part of the supply chain for automobiles and technology that is now a high value added producer. Japan makes things that cheap labor in China and southeast Asia does not. That has affected manufacturing output globally, and likely will no longer be an overhang by the fourth quarter of 2011.

Second, the U.S. has had an amazingly lousy weather season this year. Major floods all along the central midwest and south are at levels not seen since the 1930's. Tornados and storms have been more frequent than at any time since the 1970's. Then there is the residual economic drag from the gulf spill, both to fishing and tourism, that weakens a vulnerable area.

Third, the lingering impact of the great recession still inhibits market participants and causes the still prevalent avoidance of risk by many to move to the extreme rapidly when the market looks unsettled.

These three reasons for market weakness will all pass. The marginal weakness in jobs and once again in housing are both follow-ons from these concerns.

There are issues that can be troublesome for sure. The new aggression of the government against corporates and the overstepping of individual civil rights is disturbing. The whistleblower awards are simply inviting corruption for payoff and the widespread wiretapping and taking sets of words out of context to force plea bargains and tainted testimony is hideous. Obama and Levin's resentments are not the stuff of healthy capital markets and they could care less. Some more stringent regulation of securities law can be a good thing(SAC scrutiny is long, way long, overdue) but bending rules for enforcement actions can be a slippery slope for our democracy.

Another issue rarely mentioned in the slowdown now is the move away from the Bush era's see no evil approach to immigration enforcement. Immigrants, legal or illegal, fuel growth. They do things, make things, buy things, and add to the economy. They always have. With more enforcement and criminalizing hiring even by unknowing companies, there is now an end to that growth component. Obama has kowtowed to the rigid xenophobes and not succeeded in getting any concessions for citizenship and rights for long time residents.

Those are creeping, creepy, issues. The "debate" over the debt ceiling is not. There is zero benefit from the current impasse and showmanship. There is simply not any sane leeway at the moment to make dramatic spending cuts and there is too much risk to curtailing normal debt service and government services in August. Tax increases for the richest somehow are not possible but we have a completely screwed up tax code that could be rejiggered to be simpler, more fair, and raise more money without any change in the most well known benchmarks. That would require work, not political posturing, to accomplish. Hell, let's just have some Captain Crunch and watch a Law and Order rerun, and then get some shuteye. All this political stuff leaves no time for constructive work, and the whole World sees our lazy asses.

QE2 ends soon. We all know it and that's a good thing. An almost zero interest rate is good for the government and no one else. Look at Japan. We need to get beyond the natural disasters and climate disruptions, focus on corporate profitability, and move beyond the politics of resentment and self-righteous phony Americana. Will that happen?

Probably it will. We still have more luck than we deserve. We have problems but the U.S. still functions more reliably than most countries. That might not be the case ten years from now, but it still is today.

Wednesday, June 01, 2011

This website is the free information service and teaser for Bespoke's more extensive analysis. No subscription to the full site here, but this is still a terrific source of market thoughts and stats.

Take a look at the many city charts of residential real estate prices from two days ago. All up from the 2009 trough until early 2011 and then mostly uniform steps down again.

Think about the analysis today of the impact of Japan's earthquake on global economic growth, and the parallels now with the 1995 Kobe earthquake.

Just a suggestion...